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Executives

Jim Alderson - Director, IR

David Steiner - CEO

Bob Simpson - SVP & CFO

Analysts

Scott Levine - JPMorgan

Hamzah Mazari - Credit Suisse

Jonathan Ellis - Bank of America

Corey Greendale - First Analysis

Bill Fisher - Raymond James

Richard Skidmore - Goldman Sachs

Michael Hoffman - Wunderlich Securities

Waste Management, Inc (WM) Q2 2010 Earnings Call July 29, 2010 10:00 PM ET

Operator

Good morning, my name is Tia and I will be conference operator today. At this time, I would like to welcome everyone to the second quarter 2010 earnings release conference call. (Operator Instructions). I’ll now turn the conference over to Mr. Jim Alderson, Director, Investor Relations. Sir, you may begin.

Jim Alderson

Thank you, Tia. Good morning everyone and thank you for joining us for our second quarter 2010 earnings conference call. With me this morning are David Steiner, Chief Executive Officer and Bob Simpson, Senior Vice President and Chief Financial Officer.

David will start things off with the summary of the financial results for the quarter and a review of the details of our revenue growth including price and volume trends. Bob will cover the financial statement. We will conclude with questions and answers.

During their statements any comparisons made by David and Bob, unless otherwise stated will be with the second quarter of 2009. Before we get started, let me remind you that in addition to our press release that was issued this morning, we have filed a Form 8-K that includes the press release as an attachment and is available on our website at wm.com. The Form 8-K, the press release and the schedules to the release include important information that you should refer to.

In some cases, David and Bob will discuss our results on as adjusted basis including net income, earnings per diluted share, which they may refer to as EPS, operating expenses, effective tax rate and income from operations margin. These financial measures have been adjusted for items management believes do not reflect their fundamental business performance and are not indicative of our results of operation.

All of these measures in addition to free cash flow are non-GAAP measures and you can find reconciliations to the most comparable GAAP measures in this schedule to the earning press release which can be found attached to the Form 8-K file today and on the company’s website at wm.com.

Additionally, during the call, you will hear certain forward-looking statements based on current expectations, opinion or belief of our future period. Those statements are subject to certain risks and uncertainties that could cause actual results to differ materially.

Some of these risks and uncertainties are detailed in our press release this morning and in our filings with the Securities and Exchange Commission, including the Form 10-K, filled for 2009.

This call is been recorded and will be available 24 hours a day beginning approximately 1 pm eastern time today until 5 pm eastern time on August 12. To hear of the call over the internet, access the Waste Management website at wm.com. To hear a telephonic replay the call, dial 800-642-1687 and enter reservation code 811-166-07.

Time-sensitive information given during the course of today’s call, which is occurring on July 29 2010, may no longer be accurate at the time of the replay. Any redistribution, retransmission or rebroadcast of this call in any form without the express written consent Waste Management is prohibited.

Now I will turn the call over to Waste Management CEO David Steiner.

David Steiner

Thank you, Jim and good morning from Houston. We earned $0.54 per share in the second quarter consistent with our quarter and full-year expectations. We did this despite a $0.01 headwind from accounting adjustments related to remediation reserves at our (inaudible) and a $0.01 headwind from increased advertising relating to our new Bagster product. We also continue to see positive signs in volumes that point to further volume improvements throughout the remainder of the year which reinforces our belief that we see will volumes turn positive in the second half of the year.

Revenue increased by $206 million or 7% from the prior-year period. This is the second consecutive quarter of year-over-year revenue growth. Major drivers of our revenue improvement were improved recycling commodity prices, acquisitions and year-over-year increases in revenue growth from yield.

Internal revenue growth from yield on our collection and disposal operation was 2.3% in the second quarter, a marked improvement compared with the first quarter of 2010. Through our discipline and focus on pricing, we overcame much of the first half affect of low and even negative consumer price indices.

As you all know our municipal and franchise contracts are generally adjusted based upon a CPI index. Approximately 35% of our overall collection business is from municipal and franchise contracts. Due to the low to negative CPI in the second half of 2009, the contracts that adjusted at the end of 2009 contributed much less to our pricing results than in prior years.

In Q1 we had a 70-basis point drag to our reported yield from these adjustments and in the second quarter, we had a headwind of about 90 basis point. My congratulations go to our pricing team and field management for overcoming these pricing headwinds. But we need to be just as diligent in the second half of the year. As I mentioned last quarter each field management team has a specific pricing plan tailored to their customer base and designed to meet their area’s 2010 pricing goals.

We remain committed to our pricing discipline and we’ve designed our annual management incentive plan for the second year in a row with minimum pricing targets. Targets were set for the areas, groups and companywide. Overall those targets increased by 50 basis points in 2010. These targets must be met in order for eligible employees to receive a bonus under the 2010 annual incentive program.

Despite the yield improvement we made in the second quarter, we still have not met our companywide pricing gate. And 2010 bonuses are still at risk. As you can imagine that has our mangers focused on utilizing all of their pricing levers to meet their pricing plans.

So for the second half of the year we expect revenue growth from yield to continue to improve and to be in a range of 2.3% to 2.6%. The combined internal revenue growth from yield in the industrial, commercial and residential lines of our collection business was 2.7% in the second quarter. Commercial and industrial yields were 3.1% and 3.4% respectively.

The yield component of internal revenue growth in our residential line of business was 1.8%, reflecting lower prices from CPI adjustments in the first half of the year. New business pricing for the second quarter was strongest in our commercial line of business and increased for the fourth straight quarter.

Service increases, net of service decreases continue to improve during the second quarter of 2010, and are net positive for the second consecutive quarter. They’ve been steadily improving since the second quarter of 2009. On the volume side of the business, internal revenue growth from volume declined 2.9% in the quarters, a significant improvement from the first quarter of 2010.

This is the third quarter in a row that volume has improved compared with the prior year period. In our collection business, our commercial and residential collection line saw volume declines of 4.8% and 4% respectively. In our more economically-sensitive industrial line of business, volumes were down 5.9%, a significant improvement compared with the volume decline of 12.4% in the first quarter of this year.

This is the first single digit volume decline in the industrial line of business since the third quarter of 2008.

Despite the lower volumes, we continue to maintain our focus on pricing in the industrial line of business which resulted in revenue growth from yield of 3.4% for the quarter. Overall, we continue to expand our income from operation’s margins in the collection line of business which increased by sixty basis points compared with the prior year period.

In the landfill side of the business, second quarter 2010 internal revenue growth from volume moved from negative to flat, which is the best volume performance we’ve seen, since the third quarter of 2008. Internal revenue growth from volume for special waste was positive 12.4% which is the second consecutive quarter of positive special waste volumes with yield for special waste being up slightly.

For MSW, internal revenue growth from volume was negative 1.6%. Volumes continue to be the softest in our more economically sensitive C&D line which was negative by 13.7%. This is a significant improvement from the negative 25.6% volume decline in the first quarter of 2010.

Clearly the negative volume trends in the C&D line of business are showing steady improvement since the lows reached in the fourth quarter of 2009. On the pricing front, MSW per unit landfill pricing was up by 3.1%, continuing the strong pricing we have seen in recent quarters Another sign of our pricing commitment is the second quarter per unit landfill pricing for our C&D business line which was up 4.3% despite the 13.7% decrease in volumes.

Over the last three quarters, we have seen a steady improvement in volumes in our most economically-sensitive business lines namely landfill and industrial. We expect this trend to continue and we believe volume comparisons will continue to improve with volumes turning positive in the second half of the year.

Increased commodity prices contributed about $0.05 of positive year-over-year earnings per diluted share in the second quarter of 2010. For the second half of 2010, we expect recycling commodity prices on average to be somewhat above second half of 2009 prices and to provide an earnings benefit of $0.01 to $0.03 per diluted share compared with the second half of 2009.

As anticipated, second quarter electricity sales prices at our waste energy operations were slightly lower than the prior year period, causing a $3million negative impact to electricity sales revenue.

During the second half of 2010, we anticipate electricity sales prices will be higher than the prior-year periods resulting in a benefit of $0.01 to $0.03 per diluted share which is consistent with previously issued guidance. We continue the expansion of our new Bagster business in the second quarter.

For those of you not familiar with Bagster, it’s a unique retail offering in our industry, “a Dumpster in a Bag”. Customers can go into a retail store and purchase a Bagster bag and then take it home and use it to dispose of remodeling and clean up debris.

When the bag is full, our customers call us and we pick it up for disposal. We kicked up a national advertising campaign including television commercials on cable stations. We added 53 metropolitan markets for the service footprint which now includes markets in 40 states and most of Canada.

The number of retail locations selling the Bagster bag increased to 3200 by the end of the second quarter. Of course as in the launch of any new product, there are start up costs and we had about $0.01 of those costs in the quarter. During our Investor Day in March of this year, we said that we anticipated the economy would slowly, but steadily improve.

The signs we saw during the second quarter are consistent with this view. And therefore we are on track to meet our full-year earnings forecast of $2.09 to $2.13 per diluted share. So in summary, we are quite pleased with our second quarter. We expect that we will continue to build upon the positive trends that we saw in the second quarter.

Internal revenue growth from yield was up and should continue to improve in the second half of the year. Volumes should turn from a negative headwind to a positive tailwind. Electricity prices at our (inaudible) plants should show year-over-year improvement in the second half of the year and commodity prices should continue to provide benefit.

These are all positive signs and our management team is prepared to execute to ensure that we maximize our operating leverage as the economy improves and with that I’ll turn the call over to Bob.

Bob Simpson

Thank you, David. I will begin by discussing operating costs. These costs increased by $178 million year-over-year. Cost of the goods sold increase $77 million in the quarter, mainly because of higher recycling commodity rebates related to the $129 million increase in recycling revenue. The net affect of this was $0.05 EPS benefit year-over-year in the quarter. Direct fuel costs increased approximately $29 million, primarily because of a 30% increase in fuel prices.

Fuel costs increased by more than fuel surcharge revenue in the quarter and caused a negative year-over-year impact to EPS of $0.01 and a negative impact of 30 basis points to our income from operations margin. Foreign currency translation for our Canadian-based operations accounted for an additional increase in operating costs of approximately $15 million, but also accounted for a revenue increase compared with the prior-year period of $22 million.

In addition, the company had a non-cash charge of $10 million in the second quarter of 2010 and a non-cash benefit of $22 million in the second quarter of 2009 for or a year-over-year swing of $32 million associated with the accounting affect of a reduction in the 10-year Treasury rate used to discount remediation reserves.

These accounting adjustments to our relief remediation reserves impacted our income from operations margin by 110 basis points. I would now like to just ask how we manage volatility and prices received for electricity production of our waste to energy plants. Today we sell approximately 46% of our waste to energy electricity on a merchant basis. We expect this to increase to approximately 53% by the end of 2010. The balance of our electricity is sold under long-term contracts. We currently have hedges in place in about 21% of our merchant energy stream which means our total energy portfolio is currently 64% contracted or hedged.

The hedge is short term ranging from 60 days up to nine months. If we see an opportunity, we will lock in portions of our portfolio longer term. Overtime our goal is to move toward an energy portfolio that is 80% contracted or hedged and 20% floating. The impact of electricity sales prices at our waste to energy operations caused a year-over-year negative impact to EPS of less than $0.01 which is consistent with our previously announced guidance. As a percentage of revenue in the quarter of 2010, SG&A remained unchanged to 10.9% compared with the prior year period. SG&A costs increased by $22 million to $345 million.

We discussed this increase in cost at our Investor Day in March and this increase results primarily from the national rollout of our advertising campaign for our new Bagster product, costs related to our growth initiatives and expenses to upgrade outdated information technology equipment and applications. For the remainder of 2010, we expect that some of the drivers of higher revenue and higher operating costs versus 2009 will remain a factor.

.Certainly higher recycling commodity prices and higher fuel prices seem likely. We cannot predict changes to the 10-year Treasury rate, but as I discussed movements in the rate may result in adjustments to accruals for remediation. We continue to mange our reserves, our controllable expenses closely and we expect to maximize our operating leverage as volumes improve.

As anticipated, our interest expense, net of interest income for the second quarter increased by $10 million compared with the prior-year period. This is primarily due to an increase in our average debt balance as a result of new debt issued in the fourth quarter of 2009.

And the $600 million [4.75%] senior notes issued in June of this year. We plan to use the net proceeds from that offering to repay the $600 million (inaudible) senior notes that will mature in August of this year. On June 30, our weighted average cost of debt was 5.23%.

Our debt-to-total capital ratio for the quarter was 59.9% in line with our target ratio of about 60%. The floating rate portion of our total debt portfolio was 18% at the end of the quarter. In June, we replaced our $2.4 billion revolving credit facility for a new three year $2 billion revolver.

Over the past few months, we also added $250 million of additional letter of credit capacity in a separate facility. Our $2.4 billion revolver would have gone current next month and given that a substantial portion of the facility for letters of credit we needed to replace it before that.

As we previously mentioned, the cost of the revolving credit has increased substantially in the past two years. As a result, our interest costs will increase by about $7.5 million per quarter beginning in the third quarter. And our weighted average cost of debt will be about 5.6%. We communicated this type of increase when we gave guidance at the beginning of the year and we want to remind you of that increased cost.

Our income tax rate for the second quarter of 2010 was 44.2% reflecting big changes in our estimated differed state taxes. Excluding this impact, our tax rate for the second quarter was 36.2%. Turning to cash flow in the second quarter, net cash provided by operating activities was $418 million, a decrease of $68 million compared with the second quarter of 2009. This decrease is due mainly to the working capital of effect of an increase in accounts receivables as our revenue increased this year.

Our day sales outstanding improved by 1.3 days and our bad debt expense decreased slightly. We continue to manage all of our receivables very closely. Our capital expenditure for the quarter were about $220 million, a decreased of $38 million compared with the prior-year period.

Our free cash flow for the quarter was $275 million. We continue to be on track to meet our previously discussed full-year 2010 guidance of approximately $1.2 billion for capital expenditures, in a range of $1.2 billion to $1.3 billion of free cash flow. In the second quarter of 2010, we paid $152 million in dividends and we repurchased $166 million of our common stock.

Our dividend yield is currently 3.7%. We are pleased with the results of the second quarter and recognize that the results are due to the effort and dedication of each of our fellow employees. We are grateful for their fine work and with that Tia, let’s open the lines for questions.

Operator

[Operator Instructions]

The first question will come from Scott Levine with JPMorgan.

Scott Levine - JPMorgan

So the pricing accelerated nicely in the quarter and sequentially and you’d indicated I think in the last call that you are anticipating a hike in the environmental fee of about 150 basis points. Can you talk maybe to some of the other drivers of acceleration in the face of what looks like increased headwinds from inflation and then also if you can provide a sense from a secular standpoint maybe of how you are tracking relative to your gates and whether your guidance for the second half implies that you’ll meet those gates with some room for comfort there?

David Steiner

Yes, certainly Scott as we said we expect the program to pick up in the back half of the year. We are actually very close to the gate right now and so our plans absolutely have us exceeding the gate in the back half of the year. When we look at the drivers, you hit the nail right on the head that the environmental fee was certainly a big driver contributing about $14 million sequentially from the first quarter, but with our pricing programs always the primary driver is going to be price increases and we’ve certainly accelerated those during the first quarter and the second quarter. Most of those hits even though we put them in the first quarter, they didn’t hit until the second quarter and so we saw a very aggressive pricing action on our commercial and industrial lines of business.

Scott Levine - JPMorgan

And then on the margins, I think a prior guidance was that you would see EBIT margins expand this year. Is it still your expectation or does this change with the environmental viability accounting assumption affect that in anyway, what are your thoughts on margins?

David Steiner

Our margins will expand this year. One thing to focus on is that half of the financial component of our annual incentive performance plan requires margin expansion. And so we will we think continue to expand margins as the year goes on what we expect will be last year.

Bob Simpson

Scott, when we look at margins, certainly the 10-year Treasury going down is something that is out of our control. So when we look at margins, frankly we normalize for that whether it’s positive or negative. We’ve had times when it’s gone the other way. And we normalize to take that out.

Scott Levine - JPMorgan

Okay, so in thinking about modeling even in margins, we should be excluding that headwind for Q2.

Bob Simpson

Yes.

Scott Levine - JPMorgan

Okay one last and really quickly, any change on the guidance for the tax rates for the full year.

Bob Simpson

In April we invested in a low-income housing tax credit partnership that has a return of about 30%. So, it’s a very good investment for us and it’s one of those investments where there is a little bit of money upfront, but then every further payment you make is actually less than the tax credit you will get.

And going forward, this investment will result in a loss of $6 million to $8 million every quarter that will go through other income or loss. So you saw that in this quarter, you will see that going forward. Now the tax credits resulting from this investment will reduce our effective tax rate to 36.7%. So you need to show both sides. You need to pick the $6 million to $8 million loss in other income or loss and then you then you need to show the effective tax rate of at 36.7% and we expect this investment will give us an earnings per share benefit in the future of $0.01 to $0.02 every year.

Operator

The next question will come from Hamzah Mazari with Credit Suisse.

Hamzah Mazari - Credit Suisse

Could you may be just touch on the cost side of your business and how investors should think about, you spend on growth initiatives. You talked about that in your release, in your comments. Particularly, how we should think about that going forward and then as you look out towards your pipeline on waste to energy deals and the medical side, what can we expect, how does the acquisition landscape look like, if you can touch on some of those topics.

David Steiner

Sure, when you look at the cost side of growth, in the first and second quarter we saw about $0.01 to $0.02 of expenses from those initiative. We would expect that to continue in the short term, but then to turn neutral and obviously ultimately turn positive. So those are expenses that we are glad to put out because they going to lead to growth in the future.

As far as medical waste and waste to energy, primarily we made an acquisition as you know for $150 million in the waste to energy space. We made some smaller acquisitions in the medical waste space. We don’t see any large expenditures for acquisition in either of those areas going forward. Mostly we will be doing Greenfield size on the medical waste side and then we will be winning bids on the waste to energy side and with the waste to energy fees, after you win a bid, you still got three to five years before you are under construction because of permitting and things like that.

Hamzah Mazari - Credit Suisse

You talked about incrementally positive volume trends and you’ve also flagged out your incremental EBITDA margins maybe close to 50% on volume coming back. First question, are you beginning to see some of that incremental margin pullthrough in your numbers right now or is that just too early for you guys and number two, are you seeing acceleration in special waste and industrial early in Q3 that you have seen at Q2?

David Steiner

Yes, from the incremental margin point of view we haven’t seen the full effect of it because we are still having negative volumes right. As we start to see volumes turn positive, that’s when you’ll see the full effect of the leverage that you discussed. On the special waste side, the pipeline still looks fairly robust.

As you know, we’ve got two consecutive quarters with positive special waste. We would expect that to be positive in the third quarter. It’s going to be difficult to continue to get that 8% to 12% type of growth, but we certainly expect it to be positive in the third quarter.

Operator

The next question will come from Jonathan Ellis with Bank of America.

Jonathan Ellis - Bank of America

I want to make sure I am clear about the pricing guidance that you have given for the year. Based on the first half results and then I think David said 2.3% to 2.6% in the second half, I am just wondering, try to understand how that gets you to the low end of the 2.5% to 3% range that you’ve previously provided, just help us understand sort of the map there or the bridge.

David Steiner

Yes, Jonathan basically what we are saying that it’s going to be very difficult to get even to the low end of that 2.5% to 3.3% price range because, both the negative effect that we had in the first half of the year, but we are also seeing a little bit more of a headwind in the back of the year from CPI.

As you saw CPI spiked in December and then it started to go down culminating in June in a 1.1% CPI. We had expected it to stay above 2% in the first half of year, so that we would get a little bit of tailwind going into the back half of year. So in the first half of the year, we had 70 basis points of headwinds in Q1. We had 90 basis points in Q2, we expect to have a similar sort of 70 to 90 basis point headwind in Q3. It starts to abate in Q4. So given that we aren’t going to get as much from CPI in the back half of the year, we dropped that overall guidance to 2.3% to 2.6% for the back of the year.

Obviously when you average those out, you can tell it is going to be difficult to get to that 2.5% target that we set.

Jonathan Ellis - Bank of America

Second question, just on your earnings guidance for the year, you told 209 to 213, consistent what you have said in the past, but obviously recycling and if I do the math on the benefit in the first and second quarters and then what you said about recycling for the second half of the year. My math suggests it is going to be 12% to 14%, $0.12 to $0.14 EPS benefit for the year.

I think previously you guided $0.04 to $0.08 for the year. So can you just help us understand what, perhaps some of the offsets are, to the boost in recycling in terms of the EPS guidance for the year?

Bob Simpson

Sure, we just talked about one of them and this the effect on yield of the lower CPI and then secondly as we talked about before, the $0.01 to $0.02 that we are spending on growth initiatives certainly is a headwind. So that pretty much offsets the benefit from recycling. And then you saw in the last couple of the quarters we haven’t been recovering all of our fuel costs with our fuel surcharge. That should continue for the back half of the year. So we’ve got a couple of headwinds that basically offset that recycling gain.

Jonathan Ellis - Bank of America

One question about on the landfill side, I want to ask about, any material benefit this quarter from -- I know you have a contract in the Gulf Coast for disposal of oily sand. Were there any material contribution this quarter, anything you are anticipating in third quarter?

David Steiner

Yes, it’s interesting that you mentioned that Jon, I think because as we’ve looked at that from the event in the Gulf, what we found is that we are into a less than half of the revenue that we’re getting is actually coming from collection of disposal. That’s because we went in and said we were going to provide a comprehensive environmental solution, so when we went in, if we had gone in just on collection and disposal, we wouldn’t be getting much revenue out of it because there’s not a lot of waste being generated.

But we went in with a lot of different solutions, both for solid waste and for liquid waste and so we saw about $20 million of revenue during the quarter at about sort of company average type margins and we’d expect that to be higher in the third quarter, but as you know with the capping of the well, you know it’s not clear how long that will continue.

Jonathan Ellis - Bank of America

Okay, that’s very helpful. Just two more quick questions if I may, one on the medical waste side. Any updates on some of the pilot projects you doing with hospitals, to sort of universal waste management within the hospitals. How does that seem to be [resonating] and also any update in terms of the leadership within that division, any other changes that have taken place since the departure of the previous head of that group?

David Steiner

Yes, we have actually seen some very good traction on the medical waste side. We just had a very large hospital chain that we did a pilot for here in Houston and they’ve just added six additional hospitals to add to the number and hopefully at some point in time we’ll continue to add to that.

From a leadership point of view, we wanted to make sure that our medical waste offering integrated with our solid waste offering and so we put one of our former market area general managers in charge of that business segment. Other than that, there haven’t been any changes in leadership, but the good news about medical waste is that we talked about it from a growth initiative point of view, the $0.01 to $0.02 that we are spending on growth initiatives, certainly medical waste would be one of those and we’re getting close to be and fully staffed from a sales point of view.

Obviously, when you are stepping up that cost to your money. Once you got that full staff in place and they start making sales is when it turns from a negative headwind to a positive tailwind, we’d expect to see that happen in the back half of the year.

Jonathan Ellis - Bank of America

My final question on the guidance for cash flow. If my math is correct, it looks like you slightly revised your cash flow from operations guidance down I think $25 million to $50 million in terms of the range. The first part of the question is does your guidance now include the legal settlement and the second part is what can be attributed to the downward revision?

Bob Simpson

It was just a review to the second question. The answer to your first question is yes it does include that and second, the downward revision is just updating from the standpoint of looking at where we are at this point in the year. It’s not a significant change.

Operator

The next question will come from Vance Edelson with Morgan Stanley.

Vance Edelson - Morgan Stanley

First just one more question on the volumes, David in your prepared remarks you mentioned overall volume comparisons turning positive during the second half, I think is the way you phrased it which could be turn positive late in the quarter. So I just want to clarify, do you expect overall positive volume comparisons for the second half as a whole?

David Steiner

Absolutely.

Vance Edelson - Morgan Stanley

With all the focus on pricing, can you describe how that’s translating in the customer retention rates? Is it competitive enough out there that you are seeing some customers walk upon facing higher rates?

David Steiner

Yes and again we got very aggressive on price increases. We knew we had to get aggressive on price increases to overcome the effect of the CPI headwind. And that caused an increase in our churn rate, not a substantial increase, but our churn rate did hit 11% in the quarter.

And so that trade off has always been very positive for us. It continues to be very positive for us and so we did see a slight uptick in churn rate. We are seeing a little bit more of action by competitors around municipal contracts and school contracts and things like that. But overall we see the pricing environment very positively.

Vance Edelson - Morgan Stanley

Okay so, municipal budget constraints you say are affecting the negotiations of bid, is that mainly price concessions or is it reduced services being agreed upon, any color you can provide there?

David Steiner

Yes, for us it is mostly a reduced service. Again the numbers aren’t real, but I will use it as an example. And that is if we have a municipality that we’d pick up twice $50 per pick up from a cost point of view, that cost us a $100. If can we go into them and say look, we can pick up once instead of twice and we can reduce it by $30 to $40. We make more money, they save some money it’s a win, win situation, so that’s been the approach that we’re primarily taking with our municipal customers.

Vance Edelson - Morgan Stanley

Any feel for whether we will see additional increases to environmental remediation reserves, should we consider that, essentially an ongoing charge or is it one-off, would you say?

Bob Simpson

It really depends on the issue and how far each specific issue is, we do I think a very good job of keeping track of that and adjusting as the defects develop, but I don’t see any specific trend here just yet.

Operator

The next question will come from Corey Greendale with First Analysis.

Corey Greendale - First Analysis

First of all also on the volumes, could you just speak to volume trends within the quarter and into July and David not to pin you down too much, but if you had to give an over under on what months by in which you positive. You think it sometime in Q3 or what would you say?

David Steiner

I think, gambling is illegal United States, Corey. So I am not sure if I can give an over under, but what we did see. As you can imagine, we saw the volumes track up fairly consistently through the quarter. In June, we actually had when you look at the combined price and volume, in June we actually had positive IRG in both the landfill and the collection line of business and so when I look at it Corey, I like to look at it from a total IRG point of view.

That’s the first time, we’ve seen positive IRG in probably two years and so when the volumes turn positive, I think it’s probably anyone’s call, but the IRG did positive in June. We hope to see that continue.

Corey Greendale - First Analysis

The comment you made about seeing maybe smaller competitors, I don’t know if you meant to fairly smaller, but generally competitors are getting more aggressive in some municipal contracts. I had two questions about that. First of all, why do you think that is happening now because obviously the economy has been back for a while and it seems like (inaudible) is actually getting a little bit better and secondly could you just remind us of what your process is for bidding municipal contracts, how much that’s done at the local level? And how much either regional or central oversight there is over that?

David Steiner

Yes, you know it’s a great question it used to be done completely locally and when we moved to a segment in our customer base, we actually put a gentleman by the name of Paul Pistono in charge of municipal contracts, to look at them more from a regional and a national point of view and so again Corey, I don’t think it’s a dramatic change. In other words as far it’s both municipal contracts and school contracts. We’ve seen some increased competition, not enough to identify a trend.

So I don’t think that what you are seeing is people reacting to the economy, I think it’s more just a one off and we are seeing that from local competitors as well as regional and national competitors. So I don’t think it’s creating a trend. I think those are just one-off examples and so when we look at the municipal business, we want to make sure that we do look at it now from a more centralized point of view and that we are making smart business decisions. There is always going to be a trade-off, when you are looking at new business versus routine business. Sometime with routine business you can keep current capital in place, so you have a much better return on capital and as you know we are focused on return on capital.

But from a bidding point of view, we want to make sure that we are getting all of the services into the RFPs that we are able to offer, so that we can provide a city a comprehensive environmental solution. So we will certainly look at it from a more centralized basis, what you are seeing I think from a competitive point of view are sort of one-off localized decisions.

Corey Greendale - First Analysis

And just one last quick housekeeping question of I could for Bob. On the tax investment that you mentioned, would you suggest modeling 36 by 7% of the tax rate for each quarter or is that an annual and is there a finite duration so this ends at some point.

Bob Simpson

This investment will run eight to 10 years, so it is going to go a long time 36/7 will be good for the rest of the year for each quarter for the rest of the year.

Operator

The question will come from Bill Fisher with Raymond James.

Bill Fisher - Raymond James

The other revenue was up like $20 million to $76 million in the quarter and you mentioned the Bagster I think $20 million of liquid waste and you get medical waste. Are they all in that line item or could help me just walk through some of that.

Bob Simpson

Some of it is, there in there a little bit, some of the special waste projects we’ve got end up in that particular line. So, that’s mostly what that is.

Bill Fisher - Raymond James

But to the extent all that stuff continues to improve and that should help and show up there essentially?

Bob Simpson

Yes.

Bill Fisher - Raymond James

Just another small and this is Bob, the Chinese to joint venture that kind of closed, is that correct or.

Bob Simpson

Yes, it is.

Bill Fisher - Raymond James

And that to the extent it shows up as equity income, it would be just be down in that other as well?

Bob Simpson

Correct.

Bill Fisher - Raymond James

Okay and then I think you said you had some lower expectations this year, but with that (inaudible), that’s more of an 2011 kind of benefit from a operating perspective?

Bob Simpson

Yes, that’s right. We expect there will be some small benefit from the Chinese venture this year, less than $5 million, but as they started up because some of the investments we are making and then putting in place the infrastructure.

Going forward, we expect that they have a much more significant benefit. Since it’s going to take a little longer than to turn significantly positive as we get in and do the startup things we have to do to get that plan up to specs.

We hope to get a little bit of benefit from that this year, but it was very small. I think we will probably have just a little bit of a negative there, but again it won’t enough to move the needle.

Operator

The next question will come from Richard Skidmore with Goldman Sachs.

Richard Skidmore - Goldman Sachs

David could you just maybe talk about the strategy that you outlined at your investor day with regards to the more focused salesforce in the key verticals and how you see that accelerating in terms of revenue growth here in the second half of 2010 or 2011 and any success stories you can articulate.

David Steiner

Yes, it’s a great question Rick and we took our sales force and put it into six separate segments and we’re certainly seeing anecdotal successes there, we talked about the Gulf Coast incident. That’s one where we had specialist that were dedicated just to that, you’ve heard us talk about are stepping in the coal ash and we’ve dedicated a team to that.

Medical waste, you’ve heard us talk about the value proposition that we can provide to the customers. And then on our manufacturing and industrial segment, we’ve seen some great successes, we just won the second largest refinery in the United States because we went in and provided a comprehensive environmental solution to them.

And so we’re certainly seeing that gain some traction. We haven’t even tried Rick quite frankly to put numbers to it because we are just finishing, we literally just finished moving our sales folks into the proper segments. We’ve begun the training of those folks in those segments, and so we haven’t tried to put a dollar amount to that, quite yet.

Richard Skidmore - Goldman Sachs

Okay David did you see the more in 2011, that it really starts to accelerate in terms of having a meaningful impact on revenue or is it something that’s even longer than that.

David Steiner

No, I think you’ll start to see it in kicking in 2011.

Operator

The final question will come from Michael Hoffman with Wunderlich Securities.

Michael Hoffman - Wunderlich Securities

Can we drill down a little bit on the free cash flow guidance $1.2 billion to $1.3 billion, need a fairly substantial improvement in your cash from ops in the second half which should we start disaggregating the pieces, looks like positive volumes drives operating leverage. Kind of need to get a 100 basis points margin improvement for that and then you need a pretty big working capital improvement?

David Steiner

Yes I think that’s right Michael. I think you’ve got it. I think you hit the nail right on the head. The one thing to recognize is that the year is playing more like 2007 and 2008 than it is like 2009. So we typically see a working capital benefit coming through cash from ops in the second half of the year as receivables from seasonality that drive up like we saw this year start getting collected. So I do think that’s what we are expecting to see.

Michael Hoffman - Wunderlich Securities

Okay, and you expect to still spend a $1.2 billion on it?

David Steiner

That’s right we do and we have to tell that number changes every year as we get into how much gets accrued at the end of the year versus actually paid versus what was period over from the prior year, but the actual spending of $1.2 billion, how much runthrough free cash flow might adjust a little bit from that?

Michael Hoffman - Wunderlich Securities

And that’s kind of a $50 million kind of a swing number usually?

Bob Simpson

From the figures in that last year, but this year I expect it to be in the normal 40 to 60 ranks or 50 is a good number

Michael Hoffman - Wunderlich Securities

And then digging a little bit on that margin issue and not going for the bet on which months, David, but can you talk about the categories, do I need MSW to go neutral to get this deposit or do I need the C&D? What’s the category that you are most focused on that needs to make that switch to have the two second half tend to be positive.

David Steiner

Yes, Michael I would look at the cyclical lines of business right. I’d look at the industrial and the C&D. Now we certainly don’t expect C&D to go from negative 13% to positive but that’s going to be offset by special ways in the landfill side. And so when you look it frankly, it comes down to rolloff poles and once we see rolloff poles going positive, that means you are coming out of that cyclical downturn and everything else follow suit.

Michael Hoffman - Wunderlich Securities

So, to your comment about positive IRG in June, one would read into that, is it why you were down 13%, for the whole quarter, you were significantly less than that in June?

David Steiner

Well what I am talking about, Michael is the overall collection and overall landfill so you have got basically special ways offsetting the negatives in C&D, so it wasn’t that all the lines went positive. It’s that within the business lines, within landfill, when you combine them and the business lines within collection when you combine them had positive IRG.

Michael Hoffman - Wunderlich Securities

The coal ash issue, we’ve got a (inaudible) out there from EPA, they are pushing this to be a subtitle C, where do you think that ends up?

David Steiner

Yeah, we certainly think it ends up subtitle D, as you know the current regulations do have a subtitle C, those regulations are in comment period right and from what we understand the overwhelming majority of comments are that it should go into subtitle D landfills and so we are going to add our voice to that and hopefully we will see those final regulations by the end of the year.

Michael Hoffman - Wunderlich Securities

And then two income statement items Bob, just so I am clear on, you gave that $7.5 million number on interest expense, what number do you expect interest expense to look like compared to the $116 million in 3Q and 4Q.

Bob Simpson

Let me just get you some more on that we got, I think we are expecting it to be 127, 125 in those two quarters.

Michael Hoffman - Wunderlich Securities

G&A, did I hear correctly, you expect a 10.9 as a percent of revenue that trend holds.

Bob Simpson

What I expect Michael is that the percentage that we had last year will carry forward and I think you will see spending come down a bit in the third and the fourth quarter, but I think as a percent of revenue, it will be pretty much the same as last year. That’s just for the investments we are making now. My personal goal is to get it down to 9% in two years out.

Michael Hoffman - Wunderlich Securities

And we are 6 months into that?

Bob Simpson

Actually no, that was - we are actually six months into my three year goal, so that is out but the clock is ticking.

Operator

At this time I would turn the conference back over to Mr. Steiner for any closing remarks.

David Steiner

Thank you. As you can see, from our second quarter results, the strategy continues to work and we look forward to giving you more on our strategy, as we get out on the road during the rest of the year. Thank you.

Operator

Thank you, for participating in today’s second quarter 2010 earnings conference call. This call will be available for replay beginning at 1 pm eastern time today through 11:59 pm eastern time on August 12th 2010. The conference ID number for the replay is 81116607. The number to dial for the replay is 1800-642-1687 or 1706-645-9291.

Thank you ladies and gentlemen. You may now disconnect.

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